When you begin planning for retirement, you need to consider two ‘spending’ buckets – a discretionary bucket and a nondiscretionary bucket.
Discretionary is just that – travel, fun and enjoyment.
The nondiscretionary spending bucket pays for basic expenses, which to the U.S. bureau of Labor Statistics should be filled with about fifty thousand dollars per year, based on the average household of those sixty-five years of age and older.
The problem with that number, is that the average Social Security benefit doesn’t cover it, since the average benefit is about $30,000 per year. That’s a gap of forty percent.
That previously mentioned fifty thousand dollars for the nondiscretionary bucket doesn’t include major household repairs, or travel, or support for others, like grandchildren, or leaving a legacy, or charitable contributions or long-term care.
If you want those additional things to happen, you need to plan on making it happen through other sources of ‘recurring’ income; so, it’s there, to spend, when you need it. Income planning at retirement should really be called a spending plan. Often times people who haven’t budgeted their entire lives are thrown into the reality that now for the rest of their lives, they need to be budget-focused; and because of inflation, the costs of that budget continue to increase evermore, the longer you live.
Many advisors discuss income-replacement-ratios with their clients, which is basically a fancy conversation of how much less do you think you can live on, during your retirement than you did, before your retirement. Well, that’s depressing. If this conversation happens just before your retirement begins, it could be a startling realization with no time for a course correction. For those folks, the earth is flat and they’re going over the edge without much hope or a prayer. For those who are planning ahead, the earth is round, and sometimes a simple course correction may get them to their final destination, safe and sound. Is your earth flat or is it round? Have you had the income-replacement-ratio conversation? Have you figured out your discretionary and non-discretionary buckets? Don’t sing the old children’s song – There’s a hole in my bucket, dear Liza, a hole. Perhaps, it’s time to fix the hole in that bucket.
